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Japan's central bank raises key rate and outlines bond-buying programme tapering

Editorial note: Due to the Swiss national holiday, the next edition of the LGT Navigator will be published on Friday 2 August 2024.

The Bank of Japan (BoJ) has raised its key interest rate and outlined a roadmap for tapering its bond-buying programme. For the first time since December 2008, Japan's key interest rate is above 0.1%. The BoJ also stressed that it would continue to raise interest rates and adjust the degree of monetary accommodation if its economic forecasts were to materialise. Today's focus is on the Fed's monetary policy decision. An immediate adjustment of key rates, i.e. a cut, is not expected today, but only in September, although a surprise cannot be ruled out given the latest inflation data. 

Date
Auteur
Alessandro Fezzi, LGT Research Content & Publications
Temps de lecture
5 minutes

Bank of Japan
© Shutterstock

The Bank of Japan raised its key interest rate to "around 0.25%" from the previous 0% to 0.1%. However, the central bank also stressed that accommodative financial conditions would continue to provide strong support to economic activity. By the end of fiscal 2024 (ending 31 March 2025), the BoJ expects core inflation to reach 2.5% and "around 2%" in fiscal 2025 and 2026. The central bank also announced that it will reduce its monthly direct purchases of Japanese government bonds to around 3 trillion yen (just under USD 20 bn) per month in the quarter from January to March 2026 (previously around 6 trillion yen per month). However, the BoJ stressed that this plan is flexible and that it will make an interim assessment of the reduction plan at its June 2025 meeting.

In Tokyo, the Nikkei 225 rose by around 0.2%, recouping earlier losses, while the broad Topix gained around 0.4%. Retail sales also had a positive impact, rising 3.7% year-on-year in June. South Korea's Kospi gained 0.6%, with heavyweight Samsung Electronics up around 1.6% after the company reported a year-on-year rise in operating profit in the second quarter. The small-cap Kosdaq, however, fell 0.8%. Australia's S&P/ASX 200 was up 1.3%. Hong Kong's Hang Seng Index was up 1.9% and mainland China's CSI 300 was up just under 2%.

Will the Fed continue to wait or suprise the markets?

The Fed's decision today (20:00 CET) and the subsequent press conference (20:30) will be watched with great interest. The focus will not be on expectations for an immediate rate cut, but rather on comments from Fed Chairman Jerome Powell. Although the markets are not expecting an easing of monetary policy today, the latest inflation data in the US has raised hopes of a rate cut. An "early" move by the Fed cannot therefore be completely ruled out. In the bond market, the yield on ten-year US Treasuries fell further to 4.14%.

Continued rotation - Microsoft disappoints with weaker-than-expected cloud growth

On Wall Street, the latest rotation intensified ahead of today's interest rate decision. The Dow Jones Industrial gained 0.5% to close at 40,743.33. In contrast, the S&P 500 fell 0.5% to 5,436.44 and the Nasdaq 100 indices were down around 1.4% for the day. After the close of trading, the focus was on Microsoft's quarterly results. Given the reported pace of growth in the cloud business, these were not entirely convincing, and the stock fell by more than 5% at times in after-hours trading. Meta, Amazon and Apple figures will follow later in the week.

US consumers more confident

Contrary to the latest University of Michigan survey, the Conference Board's consumer confidence barometer improved in July. The indicator rose by 2.5 points to 100.3, more than the 99.7 expected by analysts. Particularly, consumers were more optimistic about the future, while their assessment of the current situation was more pessimistic than in the previous month.

Mixed economic growth in the euro area

The eurozone economy maintained its momentum in the second quarter, surprising with slightly stronger-than-expected GDP growth of 0.3% in the second quarter. Economists had forecast a slight slowdown in economic output and a GDP growth rate of 0.2%. There were clear differences between the eurozone countries. While GDP in Spain grew by 0.8% in the second quarter, the German economy contracted by 0.1%. France and Italy reported growth of 0.3% and 0.2% respectively. At the same time, it was announced that economic sentiment in the euro area, as measured by the Economic Sentiment Indicator (ESI), deteriorated slightly in July. The indicator fell by 0.1 points month-on-month to 95.8 points, the European Commission reported. Analysts had expected a sharper decline to 95.2. Industrial firms in particular were more pessimistic.

No recovery in sight for German economy

According to the Federal Statistical Office in Wiesbaden, the decline in the German economy in the second quarter is due to weak investment or the slowdown in the global economy. In the first quarter, German GDP grew by 0.2%. The ECB's first interest rate cut in June does not yet seem to have brought about a resounding improvement in the German economy, and Europe's largest economy remains at the bottom of the G7. There seems to be no recovery in sight, as suggested by the Ifo business climate indicator, which has fallen three times. Meanwhile, the inflation rate in Germany has climbed back up to 2.3% after falling to 2.2% in the previous month.

Corporate and macroeconomic calendars

Corporate news in focus: Quarterly figures from Rio Tino, Swisscom, Schneider Electric, Danone, HSBC, Adidas, Boeing, Fresenius, Mastercard, T-Mobile, Samsung Electronics, Meta, Albemarle, Qualcomm, Qiagen.

Economic data in focus: SNB half-year results, Consumer prices eurozone, Germany, France and Italy, German unemployment, Canadian GDP, US ADP National Employment Report, Chicago PMI, Pending home sales, FOMC monetary policy decision (8pm CET) and Fed press conference (8:30pm).

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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